Introduction to the TREIF
Taiwan is located in the Circum-Pacific seismic zone, one of the world's three major seismic regions. Earthquakes are natural calamities that strike without warning. Their timing is unpredictable and their destructive power is unimaginable. In view of this threat, it is vital to implement earthquake risk management concepts at all times. Earthquake protection measures must be strengthened and related work needs to be emphasized in all situations before disaster strikes.At the same time, post-quake response measures must be firmly established and diligently practiced. Even then, we need to be aware that even the best earthquake protection measures can only minimize the destruction, not eliminate the risk of earthquakes. Since major earthquakes will still occur, it is essential to establish an insurance system for earthquake indemnification to strengthen the social safety net.
1. Origins and Development of the Taiwan Residential Earthquake Insurance Program
On September 21, 1999, a magnitude 7.3 earthquake, known as the "Chi-Chi earthquake" or "921 earthquake," struck Nantou County in central Taiwan, an event that remains fresh in the minds of the people of Taiwan today. The quake prompted the government to set up an earthquake insurance pool system and build consensus to strengthen the earthquake insurance mechanism. At the end of 1999, the competent authority also introduced amendments to amended to Article 138-1 of the Insurance Law to include provisions on underwriting residential earthquake insurance and establishment of a mechanism for assuming earthquake risk. The amendment was approved on July 9, 2001, and a prototype of the Taiwan Residential Earthquake Insurance System came into existence. In accordance with Article 138-1 of the Insurance Law, the competent authority announced the "Enforcement Rules for Residential Earthquake Co-insurance and Risk Bearing Mechanism" on November 30, 2001. The rules stipulate a liability limit of NT$50 billion and four liability tiers, including co-insurance pool members, the Taiwan Residential Earthquake Insurance Fund (TREIF), domestic and overseas reinsurance and capital markets, or the government.
Effective from April 1, 2002, all residential fire insurance policies must automatically include basic coverage for residential earthquake risk, with a maximum insured amount of NT$1.2 million per household. The annual flat premium was set at NT$1,459 (85% for the pure premium and 15% for loading).
On November 30, 2001, the competent authority announced the "Taiwan Residential Earthquake Insurance Fund Articles of Donation" and "Regulations Governing the Taiwan Residential Earthquake Insurance Fund," laying a legal foundation for the establishment of the Taiwan Residential Earthquake Insurance Fund (TREIF). It also instructed the Taiwan Insurance Development Fund to contribute NT$20 million to fund the establishment of the TREIF.
In the initial stage, the TREIF was jointly administered by the Central Reinsurance Corporation (Central Re) , under the Ministry of Finance (MOF). Central Re personnel staffed the positions of executive secretary and staff secretaries to handle all affairs of TREIF. All residential earthquake insurance policies issued by non-life insurers were assigned to Central Re, which in turn allocated them among co-insurance pool members, TREIF, domestic and overseas insurers and reinsurers, and the government. This laid the foundation for Taiwan's residential earthquake insurance system.
On December 1, 2005, the competent authority promulgated the revised "Enforcement Rules for Residential Earthquake Co-insurance and Risk Bearing Mechanism," under which the risk undertaking system was adjusted from four tiers to two tiers. Under the new system, the NT$2 billion in Tier 1 is still assumed by residential Earthquake co-insurance pool members, and the remaining NT$48 billion is assumed and then transferred by the TREIF.
On December 29, 2006, the competent authority promulgated the revised "Enforcement Rules for Residential Earthquake Co-insurance and Risk Bearing Mechanism." Under the revised rules, the limit of the residential earthquake insurance system was increased from NT$50 billion to NT$60 billion effective from 2007. Of this total, NT$2.4 billion is assumed by the co-insurance pool and NT$57.60 is undertaken and then transferred by TREIF.
In accordance with additional revisions to Article 138-1 of the Insurance Law, amended on July 18, 2007,the "Enforcement Rules for Residential Earthquake Co-insurance and Risk Bearing Mechanism" were renamed on November 26, 2007, as the "Enforcement Rules for the Residential Earthquake Insurance Risk Spreading Mechanism". Since 2008, all earthquake insurance underwritten by non-life insurers has been ceded to TREIF, which either retains or transfers the risk. This forms the basis of the current earthquake insurance operation model.
On December 30, 2008, the competent authority increased the risk bearing limit under the risk spreading mechanism of the residential earthquake insurance from NT$60 billion to NT$70 billion effective from January 1, 2009, in response to growth of cumulative liability amounts in recent years and forecasted future growth trends.
Moreover, from April 1, 2009, the annual flat premium for the insurance was reduced from NT$1,459 to NT$1,350, retaining the flat premium system, with a maximum coverage of NT$1.20 million per policyholder.
Policies provide coverage for actual total loss or constructive total loss due to fire, explosion, landslide, land subsidence, land movement, land fissure, land rupture, tsunami or sea surge caused by an earthquake. Once the insured residence is assessed to meet the requirements of a total loss, the underwriting insurer will pay the insured amount and contingent living expense of NT$180,000 to the policyholder..
Under the revised rules, the total loss mentioned above refers to situations where:
1) The government has issued a notification or order for residence demolishing or directly demolished the
residence; or
2) It is determined by assessment of a qualified loss adjustor or appraisal by the Architects Association
(Note: If this is not a specific group then no capitalization is needed.) or a professional association for building
structure, civil engineering or geoscience in Taiwan that the residence is uninhabitable or the repair cost would
equal or exceed 50% of the replacement cost.
2. TREIF's Pivotal Role in Taiwan's Residential Earthquake Insurance Program
Residential earthquake basic insurance is a statutory insurance in Taiwan. A non-profit organization therefore should play a pivotal role in implementing the program to ensure full compliance with policy objectives. During the initial implementation stage of the residential earthquake insurance program, Central Re was designated as the program administrator. It was responsible for managing the co-insurance pool and overseas reinsurance placement. It also contributed greatly to the establishment of earthquake underwriting and claim settlement guidelines and the careful selection of reinsurance placements and securities. However, it remained unclear who should assume losses that might result should an overseas reinsurer become insolvent since there were no provisions under existing regulations prescribing that Central Re should assume such credit risk. In order to resolve this problem, the authorities revised the "Regulations Governing Implementation of the Residential Earthquake Co-insurance and Risk Bearing Mechanism." Effective from December 1, 2005, the revised rules clearly designate the TREIF as the pivotal organization of the residential earthquake insurance system and actively promote the operational independence of the TREIF.